Fatal flaws in a Greek debt deal

As investors celebrate moves towards a Greek bailout, there are still clear signs the country cannot recover from within the euro and must return to its own currency to stay competitive.

Investors celebrated overnight as European leaders inched closer to agreeing on Greece’s second bailout, even though critics pointed out that the €130 billion ($US172 billion) package will not be enough to salvage the debt-riddled country.

According to Hans-Werner Sinn, the head of Munich’s prestigious Institute for Economic Research, the second Greek bailout is simply a waste of time. In an interview with the German publication der Spiegel, Sinn argued that the country’s debt will continue to climb while it remains in the eurozone.

"The basic problem is that Greece isn't competitive. The cheap loans that the euro brought the country artificially raised prices and wages and the country has to come back down from this high level.”

Sinn also pointed out that the latest package benefits Greece’s lenders, rather than the Greeks themselves. "This isn't really about the country. The Greeks are being held hostage by the banks and financial institutions on Wall Street, in London and Paris who want to make sure that money keeps on flowing from government bailout packages – not to Greece, but into their coffers.”

Greece, he argued, should exit the euro. This would make Greek products cheaper, and consumers would switch to buying domestically produced goods, rather than imports. Tourism would also get a boost. And new capital would start flowing into the country as rich Greeks, who have deposited billions of euros in Swiss bank accounts, took advantage of cheaper property prices and lower wages and began investing in their country again.

Sinn argued that the price of Greek products would have to fall by 30 per cent to reach the same level as Turkey. "Without depreciation, millions of price lists and wage contracts would have to be rewritten. That would radicalise the trade unions and push the country to the brink of civil war.”

In addition, he said, "companies would go bankrupt because their assets would shrink while their bank debts would remain unchanged. You can only reduce the bank debt through depreciation. The plan to radically restructure Greece within the euro is illusory.”

Harvard University economics professor Kenneth Rogoff also believes that Greece will remain uncompetitive while it remains in the eurozone, even though Athens has been forced to adopt vicious austerity measures as part of its second bailout.

In a separate interview with der Spiegel, Rogoff argued that Greece should be allowed to take a "sabbatical” from the euro, and to reintroduce its own currency. The drachma would fall sharply against the euro, which would boost the competitiveness of Greece’s export and tourism sectors. Greece could then rejoin the eurozone at a later date, when it had reached a higher level of social, political and economic development.

Rogoff also rejected the argument that strong German competitiveness was causing problems for Portugal and Spain. "That is absurd. Portugal and Spain’s problem isn’t Germany, it’s China. The south Europeans have to understand that they cannot maintain their current standard of living in the context of globalisation without significant economic reform.”

He added that southern European countries had seen steep increases in wage rates over recent years, even though they traditionally manufactured relatively simple goods, such as textiles. "They are no longer competitive in a global context, which is why production has shifted to Asia," he said.

In contrast, Germany had an innovative industrial sector, and there was strong demand for its high-quality products in the emerging economies. "That is why Germany has been the winner in the globalisation process, while Portugal, Spain, Italy and others are among the losers.”

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